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Project finance is the financial analysis of the complete life-cycle of a project. Typically, a cost-benefit analysis is used to determine if the economic benefits of a project are larger than the economic costs. The first step of the analysis is to determine the financial structure, a mixture of debt and equity, that will be used to finance the project. Then, identify and value the economic benefits of the project and determine if the benefits outweigh the costs.
1. Pre-Financing Stage
2. Financing Stage
3. Post Financing Stage
Sponsors are usually the equity share capital holders of the parent company
It may be a single lender or a consortium of financial institutions. The loan is secured strictly against the cash flows and assets of the SPV only. Therefore, sufficient due diligence is performed before the grant of any credit.
It is basically the Project Company that will own, develop, construct, operate, maintain, conduct, etc. the project. It is a separate legal entity floated by the sponsors of the project. The project finance obtained is directed exclusively only towards this SPV.
Refers to the government of the home country where the SPV is located. The SPV must be incorporated in accordance with the government’s rules and regulations. It also often acts as a guardian angel in providing various tax concessions, subsidies, and rebates, permits, licenses and authorisations.
Off-takers are bound via an off-take agreement to mandatorily purchase a certain minimum quantity of produce from the selling party. An off-take agreement is a frequently resorted to in mining, construction and other industries. The vendor (SPV) incurs a huge amount of capital expenditure. An off-take agreement ensures the seller of the existence of a market upon completion.
As in any construction job, suppliers and contractors are necessary for the execution of a contract. They are the key suppliers of raw material. They also perform crucial functions such as design and build (D&B), operations and maintenance (O&M), etc.